Bears come out of hibernation

FOMC, Bernanke, State of Union and more earnings could provide fresh bait

By

LauraMandaro

SAN FRANCISCO (MarketWatch) -- U.S. stocks face a lengthy lineup of political and corporate events in the coming week that could reinforce -- or derail -- a recent bout of selling some analysts are calling a correction.

A Federal Reserve rate meeting, President Barack Obama's state of the union address and the possibility that Fed Chairman Ben Bernanke won't get his confirmation vote may take center stage.

Plus, 12 members of the Dow Jones Industrial Average
DJIA, +0.33%
and 130 companies in the S&P 500
SPX, +0.22%
report results. And China may again spook markets if data or policymaker comments signal Beijing is getting closer to raising rates.

Global monetary policy, U.S. politics and corporate results can take much of the credit for stocks' sorry performance in the past week.

"This is a correction precipitated by fear about a Chinese slowdown, uncertainty at the Fed and populist rhetoric by Mr. Obama on banks," said John Praveen, chief investment strategist at Prudential International Investments Advisers.

The Dow average suffered its worst weekly point loss since February 2009, losing 437 points, and closed 5.5% off its recent 52-week high. The S&P 500 closed 3.9% lower for the week and 5% from a recent high. The Nasdaq Composite
COMP, +0.44%
tumbled 3.6% last week.

"Correction time again," Michael Hartnett, chief global equity strategist at Bank of America-Merrill Lynch wrote in a note made public Friday.

He cited "excess New Year optimism," for the pullback, plus concern over monetary policy tightening in China and worries over U.S. financial policies that could impact the creation of credit.

Bernanke and Obama

Many of the past week's fears are likely to linger, and Washington will play a key role in setting the tone.

Investors will be listening closely to Wednesday's Federal Reserve statement.

It's expected to keep rates near 0% and largely stick to its schedule for ending its special liquidity, or bond-buying, programs. But any language about the economy or these special programs that suggests it's getting closer to raising interest rates could further punish stock and commodities.

Stocks, oil and emerging markets currencies have all rallied in the past year on the belief government stimulus programs in China, the U.S. and elsewhere, coupled with ultralow rates, would help the global economy bounce out of a deep slump. The assets perceived as riskiest have performed best, thanks in part to low borrowing costs.

The prospect for rising rates, in turn has walloped the high-flying investments recently.

Oil ended the past week with a 4.7% drop on concerns about tepid demand for fuel, hastened in part by expectations China would soon cool its growth. Brazil's currency sank 1.8%, while its stock market sank 4%. Read latest on China.

Besides the Fed, the Bank of Japan and central banks in a handful of emerging markets countries, including Brazil, South Africa, Hungary, Poland and India, all hold policy meetings.

There's a bunch of U.S. economic releases, including December home sales and January consumer sentiment.

On Friday, the U.S. government will release its report on fourth-quarter gross domestic product. Analysts polled by MarketWatch are anticipating the economy expanded at a 5.5% rate in the last three months of the year.

In his state of the union address, Obama may address the increasingly tenuous prospects for passing the type of overhaul Obama and many Democrat leaders wanted. Read more on health overhaul.

Or he may weigh in on making it harder for diversified banks to take on risk, a proposal that helped sink stocks Thursday and Friday.

"The talk is very aggressive, that's what rattling markets," Prudential's Praveen said.

Another worry: Bernanke. A Senate vote to confirm him for a second term was delayed in the past week as the Democratic leadership worked to get the needed votes. The chance Bernanke may not be confirmed before his term as chairman expires Jan. 31 added to the pall over markets, analysts said. Read the latest on Bernanke.

"If the reason he's not confirmed is simply because of a delay in the Congress, maybe because of signaling some members want to give Bernanke, the market won't be concerned for any lasting time," said Tony Crescenczi, a bond portfolio manager at Pimco.

"If the delay is occurring because there's a change in support for Bernanke, that's a different story," he said. Watch interview

On paper, companies are passing the earnings test with flying colors. Of the 92 companies that have released fourth-quarter results, 78% beat expectations for the bottom line, 4% matched and 17% fell under consensus forecasts, Thomson Reuters data showed.

The 78% figure is unusually high, compared with the 15-year average of 61% of S&P 500 companies topping expectations, according to John Butters, director of U.S. earnings research at Thomson Reuters. Read full story on expectations.

But investors haven't been that impressed, punishing stocks in companies such as Google
GOOG, +0.68%
It beat expectations but didn't give the type of sales outlook some wanted.

Investors, which had driven up stocks more than 70% from their March lows, want to hear revenue is expanding - and will keep increasing, says Praveen.

"Revenue growth will mean the outlook for earnings remains good for the next few quarters and that should be positive for stocks," he said.

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